- An overview of the amendments to the Zakat Collection Regulations for the year 1445 AH
The legislative developments regarding the provisions for collecting zakat follow an accelerated pace, in a consistent manner with the changes in the other laws in the Kingdom of Saudi Arabia, such as the companies and investment laws, accounting standards, tax laws, etc.
In this article, we provide an overview of the new provisions related to collecting zakat in accordance with the latest regulations issued by decision of the Minister of Finance No. 1007 dated 19 Shaaban 1445 AH (“Zakat Regulations 1445 AH” or “the New Regulations”).
This article aims to simplify the understanding of zakat. Zakat is a broad term, and it means growth and purity. Zakat differs according to its type. There is zakat of the soul, zakat of the body, and zakat of money. In this article we focus on the zakat of money. Zakat is considered a religious duty and as such it includes terms and conditions in determining, for instance, who is subject to it. From a religious perspective, Islamic rules also specify the use and destination of zakat revenues, which is one of the differences between zakat and income tax: zakat is used to help people in need and is collected from specific zakat funds.
If you work in Saudi or Gulf companies, or in companies with foreign and Saudi share capital in the Kingdom of Saudi Arabia, this article will contribute to improve understanding of the zakat provisions according to the New Regulations. This article provides a general and comprehensive perspective on zakat, and it cannot cover all the precise cases of taxpayers. If you have any questions or need detailed advice, please do not hesitate to contact us.
- Zakat provisions in the New Regulations
The New Regulations issued by Minister of Finance Resolution No. 1007, dated 19 Shaban 1445 AH, came in an advanced form and address the challenges in the practical reality of business. The legislator adopted the introduction of the zakat provisions in accordance with the provisions of Islamic Sharia to help taxpayers comply with the zakat provisions. The New Regulations show that the legislator in the Kingdom, when drafting the regulations, periodically reviewed previous provisions and legislation, as well as reviewed the zakat issues, polled taxpayers, listened to their comments, and studied and reviewed the matter alongside with the Sharia committees in the Kingdom.
The New Regulations took a different path in calculating zakat, as it relied on the values appearing in the statement of financial position, rather than determining the elements/items of addition or deduction from the zakat base. Previously, the work consisted of investigating the history of the emergence of the item or determining the link between funding sources and their uses. The Saudi legislator adopted the principle of matching and placement between assets and liabilities in the zakat base.
The Saudi legislator came up with new provisions in the regulations. The most prominent amendments to the current regulations are as follows:
- Unifying concepts. The New Regulations brought a set of definitions and concepts for a number of legal terms, in addition to the components of the zakat base. It also expanded some concepts about zakat documents such as the zakat declaration and the information declaration. These clarifications facilitate the interpretation of the statutory texts and make the interpretations of the zakat taxpayers compatible with the practical applications of the Zakat, Customs and Tax Authority (“ZATCA”).
- Classification of allocations. ZATCA’s practice previously was to add allocations as one of the items of property rights, and this is what the zakat taxpayers objected to, because it is considered that allocations are obligations and are the reasons that prevent zakat on them. To limit the scope of the dispute, the New Regulations came by reclassifying the allocations into two parts: allocations that are treated as non-current obligations that are added within the limits of deductions, and allocations that are treated as one of the items of property rights that are added to the zakat base, in accordance with standards set by the New Regulations, and these standards would make the zakat application of these allocations clear, and it contributes to reducing the difference between ZATCA and taxpayers.
- Zakat percentage. The 2.5% zakat percentage has not changed, but ZATCA previously worked to differentiate in the case of calculating the zakat percentage in relation to the adjusted net profit and the items in the zakat base, as the zakat percentage for the items in the zakat base considered the number of days for the item in the year, while the adjusted net profit is directly multiplied by 2.5%. The New Regulations came to unify the calculation of the zakat percentage according to the number of days without distinguishing between the adjusted net profit and the items of the zakat base. Without a doubt, this depends on the type of year, whether it is Hijri or Gregorian.
- Distributed profits. The New Regulations made it possible to deduct the profits distributed during the year from the profits of the zakat year itself, by reducing the zakat base, in contrast to the previous work, with the stipulation that these profits were distributed in the same year and deposited in the shareholders’ account, and this is because the profits came out of the company’s liability. It is not considered part of zakat funds.
- The concept of matching assets and liabilities. The concept of matching assets with liabilities is a common concept when calculating zakat, where long-term assets are compared to non-current liabilities, short-term assets are offset by non-current liabilities, and property rights complete what remains of them. However, the New Regulations came in more detail in terms of the placement of liabilities added to the base, as it corrects the addition of liabilities if a current asset is deducted or a non-current asset is not deducted. In the last case, the non-current asset rejected from deduction is considered, a percentage of the total non-current assets is calculated, and it is compared with current liabilities to exclude it from additions to the zakat base, provided that the non-current liability does not exceed the value of the asset rejected for deduction. In the case of deducting a current asset, not only is the deduction made, but rather the percentage of this asset is calculated from the total short-term assets, and is matched by current liabilities, and added to the zakat base, provided that the added current liabilities do not exceed the value of the deducted current asset.
- Shareholders’ funding. The New Regulations provide more detail regarding shareholders’ funding of the company, as the type of company plays a major role in determining whether the financing amount will be classified as liabilities, or as equity, as follows:
- In case of a partner in a company listed on the financial market, this financing will be classified according to what is stated in the company’s financial statements, and based on this classification, the zakat treatment will be determined.
- If the financing is from a partner in an unlisted capital company, the financing amount will be classified as liabilities, and added to the zakat base within the limits of the deductible, according to specific conditions in the New Regulations. If the conditions are not met, it will be treated as equity, and will be added to the pool as It was work before,
- If the financing is from partners in a one-person company or individual institutions, it will be treated as equity, and will be added to the base.
- Investments outside the Kingdom. ZATCA’s previous practice was to often challenge the items on foreign investments if it was unable to calculate Zakat on those, which resulted in an increase in zakat obligations. The New Regulations came with new provisions for calculating the zakat on foreign investments according to the presentation of assets and liabilities in the financial statements and in accordance with certain requirements as stated in the New Regulations. That is, the balance of foreign investments will not be rejected if the zakat taxpayer completes the calculation process for his zakat according to the regulations.
- The minimum zakat base. The calculation of zakat depends on the zakat base and the adjusted profit. Previously, zakat was calculated based on the higher of the two. However, the New Regulations set a minimum limit for the zakat base and came with a more comprehensive preference as follows:
- If the company loses in the financial year, and the base is negative, and it does not make any profit, then it does not have to pay zakat. However, if the result of the base is positive, and it does not achieve a net profit, the zakat base becomes subject to zakat.
- If the company makes a profit in the fiscal year, zakat is calculated on the total undiscounted assets, in addition to the difference between the adjusted profit and book profit compared to the adjusted profit, and zakat is calculated on the higher of the two.
- The maximum limit of the zakat base. If the zakat base is higher than the equity plus the difference between the adjusted profit and the book profit, then the zakat payer’s zakat base is the equity plus the difference between the adjusted profit or loss for the year, in addition to the net book profit or loss. Accordingly, this becomes the maximum limit for what the zakat payer pays.
- Expenses allowed for deductions. The New Regulations include several provisions regarding expenses which are deductible, the most important of which are wage expenses. Previously, only the wages shown in the General Organization for Social Insurance were considered, but because the General Organization for Social Insurance sets an upper limit for wages, the New Regulations accept an excess of the maximum limit under certain conditions. The New Regulations also allow expenses related to zakat and tax paid.
- Bad debts. The requirements for resolving bad debts remain fundamentally unchanged, except that there is an exemption from one of the conditions in accordance with the New Regulations – they now exempt the person from obtaining a certificate authenticated by a certified public accountant licensed in the Kingdom stating that the debts have been written off in the event that the debts do not exceed a percentage 1% of the taxpayer’s revenues, or a final judgment has been issued declaring the debtor bankrupt or insolvent.
- Application of the New Regulations to years prior to their issuance
The taxpayer can apply the New Regulations to previous years, subject to certain conditions set out by ZATCA. Therefore, every taxpayer must study the New Regulations and compare it with the old regulations, and analyse the impact on its business activities and which regulations suits them best. It is important to keep in mind the deadlines set to this effect.
- How can we help?
Our tax zakat team is experienced in zakat issues. They have worked on zakat regulations and legislation for years, and they can analyse and advise on the benefits and inconveniences of submitting a request to apply the New Regulations retroactively. They also advise clients and represent them in zakat disputes before the zakat, tax and customs committees. They are aware of ZATCA and the Tax, Zakat and Customs Committees interpretations in practice. They also studied the new regulation in detail.
By combining previous knowledge and experience in the field of zakat advisory and litigation matters in the Kingdom of Saudi Arabia, we are in a unique position to anticipate the likely future interpretation of proposed actions and provide zakat planning accordingly.